Question 1

How do we make adjustments when a project has inputs and outputs in different currencies?

Accepted Answer

Whenever a project has cash flows that depend on the values of multiple currencies,the most convenient approach is to separate the cash flows according to the currency they depend on.

Question 2

Use the following information to answer the question(s)below.
Rearden Metal,a U.S.manufacturer,has made a purchase from d'Anconia Copper and is expecting a cash outflow of 2 million ARS (Argentine Pesos)in six months.The currency spot rate is $0.2500/ARS and the six-month forward rate is FS1U1B16monthsS1U1B0 = $0.2470/ARS.The appropriate annual discount rate for the Argentine Peso is 6.5% and the annual discount rate for the U.S.dollar is 4%.
-The present value of Rearden Metal's cash outflow computed by first discounting the cash flow at the appropriate Argentine Peso rate and then converting to dollars is closest to:

Accepted Answer

A) $469,500 
B) $475,000 
C) $481,000 
D) $484,500 
A) $469,500 
B) $475,000 
C) $481,000 
D) $484,500 D

Question 3

The amount of the taxes paid in dollars for the Japanese operations is closest to:

Accepted Answer

A) $29.5 million 
B) $5.1 million 
C) $50.0 million 
D) $20.5 million 
A) $29.5 million 
B) $5.1 million 
C) $50.0 million 
D) $20.5 million D

Question 4

The NPV of this project in Euros is closest to:

Accepted Answer

A) €54 million 
B) €57 million 
C) €62 million 
D) €65 million 
A) €54 million 
B) €57 million 
C) €62 million 
D) €65 million

Question 5

The present value of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

Accepted Answer

A) $8,950,495 
B) $8,954,615 
C) $8,943,695 
D) $8,961,420 
A) $8,950,495 
B) $8,954,615 
C) $8,943,695 
D) $8,961,420

Question 6

What is the pound present value of the project?

Accepted Answer

@#IMG-DLM& 
= @#IMG-DLM& 
(1 + @#IMG-DLM& 
)- 1 =

Question 7

Suppose the interest rate on Russian government bonds is 7.8%,and the current exchange rate is 26.8 rubles per dollar.If the forward exchange rate is 27.2 rubles per dollar,and the current U.S.risk-free interest rate is 4.6%,what is the implied credit spread for the Russian government bonds?

Accepted Answer

@#IMG-DLM& 
× 1.046 × R27.2/$ = R106,161

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) If the foreign tax rate exceeds the U.S.tax rate,companies must pay this higher rate on foreign earnings. 
B) U.S.tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed,so this extra tax credit is not wasted. 
C) If the foreign tax rate is less than the U.S.tax rate,the company pays total taxes equal to the U.S.tax rate on its foreign earnings. 
D) A full tax credit is given for foreign taxes paid up to the amount of the U.S.tax liability. 
A) If the foreign tax rate exceeds the U.S.tax rate,companies must pay this higher rate on foreign earnings. 
B) U.S.tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed,so this extra tax credit is not wasted. 
C) If the foreign tax rate is less than the U.S.tax rate,the company pays total taxes equal to the U.S.tax rate on its foreign earnings. 
D) A full tax credit is given for foreign taxes paid up to the amount of the U.S.tax liability.

Question 9

Use the following information to answer the question(s)below.
Hammond Motors is considering an investment in the Euro area.The expected free cash flows,in Euros,are uncorrelated with the spot exchange rate and are as follows:   The new project,which Hammond is considering,has similar dollar risk to Hammond's other projects.Hammond knows that its overall dollar WACC is 10%,so it feels comfortable using this WACC for the project.The risk-free interest rate on dollars is 4% and the risk-free interest rate on Euros is 6%.Hammond is willing to assume that capital markets in the United States and the Euro area are internationally integrated.
-Hammond's Euro WACC is closest to:

Accepted Answer

A) 7.9% 
B) 8.7% 
C) 10.2% 
D) 12.1% 
A) 7.9% 
B) 8.7% 
C) 10.2% 
D) 12.1%

Question 10

Use the information for the question(s)below.
Luther Industries,a U.S.Corporation,is considering a new project located in Great Britain.The expected free cash flows from the project are detailed below:   You know that the spot exchange rate is S = 1.8862/£.In addition,the risk-free interest rate on dollars and pounds is 5.4% and 4.6% respectively.Assume that these markets are internationally integrated and the uncertainty in the free cash flow is not correlated with uncertainty in the exchange rate.You have determined that the dollar WACC for these cash flows is 10.2%.
-Calculate the pound denominated cost of capital for Luther's project.

Accepted Answer

@#IMG-DLM& 
= @#IMG-DLM& 
(1 + @#IMG-DLM& 
)- 1 =

Question 11

The amount of the taxes paid in dollars for the Irish operations is closest to:

Accepted Answer

A) $20.5 million 
B) $5.1 million 
C) $29.5 million 
D) $50.0 million 
A) $20.5 million 
B) $5.1 million 
C) $29.5 million 
D) $50.0 million

Question 12

Consider the following equation:  
=  
(1 +  
)- 1
The term r¥ in this equation refers to:

Accepted Answer

A) the cost of capital for the firm in terms of yen. 
B) the risk-free rate of interest on the dollar. 
C) the cost of capital in terms of dollars. 
D) the risk-free rate of interest on the yen. 
A) the cost of capital for the firm in terms of yen. 
B) the risk-free rate of interest on the dollar. 
C) the cost of capital in terms of dollars. 
D) the risk-free rate of interest on the yen.

Question 13

Use the following information to answer the question(s)below.
Incorporated Tool,a U.S.firm,is considering its international tax situation.The corporate tax rate in the U.S.is currently 39%.Incorporated Tool has major operations in Ireland,where the tax rate is 12.5%,Japan where the tax rate is 40.7%,and Mexico,where the tax rate is 30.0%.Incorporated Tool's profits,which are fully and immediately repatriated,and foreign taxes paid for the current year are as follows:  
-Assuming that the Japanese and Mexican subsidiaries did not exist,the U.S.tax liability on the Irish subsidiary would be closest to:

Accepted Answer

A) $81 million 
B) $103 million 
C) $106 million 
D) $156 million 
A) $81 million 
B) $103 million 
C) $106 million 
D) $156 million

Question 14

What is the dollar present value of the project?

Accepted Answer

@#IMG-DLM& 
= @#IMG-DLM& 
(1 + @#IMG-DLM& 
)- 1 = @#IMG-DLM& 
(1.102)-

Question 15

Using the covered interest parity condition,the calculated three-year forward rate F3 is closest to:

Accepted Answer

A) $1.8568/£ 
B) $1.9161/£ 
C) $1.8961/£ 
D) $1.8764/£ 
A) $1.8568/£ 
B) $1.9161/£ 
C) $1.8961/£ 
D) $1.8764/£

Question 16

Consider the following equation:
S ×  
=  
The term  
In this equation is:

Accepted Answer

A) the appropriate cost of capital from the standpoint of a U.S.investor. 
B) the risk-free rate for a foreign investor. 
C) the risk-free rate for a U.S.investor. 
D) the appropriate cost of capital from the standpoint of a foreign investor. 
A) the appropriate cost of capital from the standpoint of a U.S.investor. 
B) the risk-free rate for a foreign investor. 
C) the risk-free rate for a U.S.investor. 
D) the appropriate cost of capital from the standpoint of a foreign investor.

Question 17

Consider the following equation:
S ×  
=  
The term F in this equation is:

Accepted Answer

A) the future spot exchange rate. 
B) the current spot exchange rate. 
C) the amount of foreign currency. 
D) the forward exchange rate. 
A) the future spot exchange rate. 
B) the current spot exchange rate. 
C) the amount of foreign currency. 
D) the forward exchange rate.

Question 18

Assuming that the Irish and Mexican subsidiaries did not exist,the U.S.tax liability on the Japanese subsidiary would be closest to:

Accepted Answer

A) $0 
B) $81 million 
C) $103 million 
D) $106 million 
A) $0 
B) $81 million 
C) $103 million 
D) $106 million

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) U.S.tax policy requires U.S.corporations to pay taxes on their foreign income at the same rate as profits earned in the United States. 
B) The home government gets an opportunity to tax the income from a foreign project to the domestic firm. 
C) The general international arrangement prevailing with respect to taxation of corporate profits is that the home country gets the first opportunity to tax income. 
D) The home government must establish a tax policy specifying its treatment of foreign income and foreign taxes paid on that income. 
A) U.S.tax policy requires U.S.corporations to pay taxes on their foreign income at the same rate as profits earned in the United States. 
B) The home government gets an opportunity to tax the income from a foreign project to the domestic firm. 
C) The general international arrangement prevailing with respect to taxation of corporate profits is that the home country gets the first opportunity to tax income. 
D) The home government must establish a tax policy specifying its treatment of foreign income and foreign taxes paid on that income.

Question 20

Consider the following equation:
S ×  
=  
The term  
In this equation is:

Accepted Answer

A) the risk-free rate for a foreign investor. 
B) the risk-free rate for a U.S.investor. 
C) the appropriate cost of capital from the standpoint of a foreign investor. 
D) the appropriate cost of capital from the standpoint of a U.S.investor. 
A) the risk-free rate for a foreign investor. 
B) the risk-free rate for a U.S.investor. 
C) the appropriate cost of capital from the standpoint of a foreign investor. 
D) the appropriate cost of capital from the standpoint of a U.S.investor.

Exam 31: International Corporate Finance

How do we make adjustments when a project has inputs and outputs in different currencies?

The amount of the taxes paid in dollars for the Japanese operations is closest to:

The NPV of this project in Euros is closest to:

The present value of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

What is the pound present value of the project?

Suppose the interest rate on Russian government bonds is 7.8%,and the current exchange rate is 26.8 rubles per dollar.If the forward exchange rate is 27.2 rubles per dollar,and the current U.S.risk-free interest rate is 4.6%,what is the implied credit spread for the Russian government bonds?

Which of the following statements is FALSE?

The amount of the taxes paid in dollars for the Irish operations is closest to:

Consider the following equation: = (1 + )- 1 The term r¥ in this equation refers to:

What is the dollar present value of the project?

Using the covered interest parity condition,the calculated three-year forward rate F3 is closest to:

Consider the following equation: S × = The term In this equation is:

Consider the following equation: S × = The term F in this equation is:

Assuming that the Irish and Mexican subsidiaries did not exist,the U.S.tax liability on the Japanese subsidiary would be closest to:

Which of the following statements is FALSE?

Consider the following equation: S × = The term In this equation is:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

Filters

Consider the following equation: = (1 + )- 1 The term r_¥ in this equation refers to:

Using the covered interest parity condition,the calculated three-year forward rate F₃is closest to: